How will Japan crisis affect your money?

World stock markets have been in turmoil since the earthquake and tsunami hit Japan last week. Japan’s Prime Minister has described the tragic events as the country’s worst crisis since World War II.

The Nikkei stock market in Tokyo plunged 17 pc in two days — wiping around £400 billion off the value of Japan’s biggest companies. Shares have fallen more over two days than since the crash of October 1987.

Even if investors don’t hold any money directly in Japan, it’s likely they will be affected. Some 60 pc of income from Britain’s biggest companies comes from overseas. It is, after the U.S. and Europe, the third-biggest importer of UK goods.

Aftermath: Only rubble remains

Other stock markets have followed the falls. The FTSE index of leading UK shares, and German and French shares were all down on Monday and Tuesday.

British investment houses reckon Japan’s gross domestic product — the money it makes from producing goods — could drop by up to 7 pc.

The key to longer term falls in the Japanese stock market, and a knock-on effect round the globe, is what happens with its current nuclear power plant crisis. A meltdown would cause long-term chaos, but if this is brought under control then they could recover quickly.

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While Japan has some of the world’s biggest brands, and is a leader in the car and technology industries, investment experts say their companies are well protected. One of the reasons for the success of Japanese firms has been that they have always outsourced manufacturing around the world. Many companies have factories in Japan, but also in Europe and the U.S.

Honda, for example, has had to cease production of cars in Japan, but is continuing to make them at its other factory in Swindon.

Japan has not been a popular place to invest for more than two decades, as interest rates are zero and share prices have remained flat. The best Japanese funds are relatively small — GLG Japan Core Alpha is the biggest with £1.1 billion.

Typically, these funds hold a host of well-known international companies such as Mitsubishi, Panasonic, Ricoh, Nippon and Mazda. As such, they are not so dependent on the fortunes of the Japanese economy alone.

The full effect on these funds is not yet known, as many have not repriced since the earthquake. However, they are likely to have fallen. So if you are already invested in Japan the message from investment experts is to hold on — as in the longer term the market should pick up.

Darius McDermott, managing director at financial adviser Chelsea Financial Services, says: ‘Japan has always been a cheap market and the tragic events of the last few days have reduced prices further.

‘You may feel uncomfortable about buying Japanese funds at the moment, but putting money into its companies actually helps support its economy.’

The large-scale devastation from the earthquake and tsunami will mean that Japan is going to need to rebuild. However, taxes may also rise to pay for the reconstruction.